Will China's leaders go big and enact serious reforms at the upcoming Third Plenum?

By Robert Keatley<p>
Robert
Keatley is a former editor of the South China Morning Post and the Wall Street Journal Asia.
</p>

November 8, 2013

Chinese leaders haven’t exactly downplayed the importance of the Third Plenum, the big Communist Party confab to be held in Beijing from Nov. 9 to Nov. 12. China’s president Xi Jinping has promised to unveil a "blueprint of comprehensive reform" at the meeting, while Yu Zhengsheng, ranked fourth in the Party hierarchy, called the reforms it plans to "explore" at the upcoming meeting "unprecedented."

Indeed, China’s slowing economy and unprecedented pollution, among other pressing concerns, indicate that there is an overwhelming need for reform. And the Third Plenum is often the venue to roll out bold new plans. While Party Congresses generally announce new leadership — the 18th such soiree in November saw Xi Jinping ascend to the presidency — and the subsequent First and Second Plenums generally deal with personnel and organizational matters, Third Plenums have traditionally enacted the most meaningful changes.

There are two historic Third Plenums to which the upcoming meeting is being compared. The Third Plenum in 1978 opened China to the global economy and abandoned the policy, known as the "two whatevers," of obeying whatever Mao Zedong had decided or decreed. And in 1993, a year after Deng Xiaoping urged more economic openness on his influential Southern Tour by visiting areas like the boomtown of Shenzhen and publically praising reform, that Third Plenum approved the concept of building a "socialist market economy," giving Chinese leaders political cover for introducing more free market features.

And on economic matters, there is much that needs to doing. The country has enjoyed double-digit growth for 30 years, an unprecedented feat which lifted hundreds of millions out of poverty. This monumental effort, however, relied on massive state spending, huge volumes of low-cost exports based on cheap labor, and more recently, a real estate bubble. But this strategy hasn’t allowed the growth of a consumer-based economy necessary for China to transition to a sustainable model. As China’s economic boom slows — 2013 gross domestic product growth is expected at 7.5 percent or less, down from 10.4 percent in 2010 — Chinese leaders are casting around for a new model.

China’s top officials favor serious economic reforms, with Premier Li Keqiang playing the role of point man. But most other members of the seven-man Standing Committee of the Politburo — the top of China’s power pyramid — seem risk-averse, hindering Li’s efforts.In early July, for example, the State Council, helmed by Li, approved the opening of a new kind of special free trade zone in Shanghai. Free of many restrictions found elsewhere in the country, the zone was to reverse the usual Chinese practice of forbidding everything unless specifically authorized: Instead, it would allow practically any business venture not specifically prohibited.

At least, that was the idea. But when the zone opened on Sept. 29, neither Li nor any other senior official attended the opening ceremony, suggesting the leadership was having second thoughts about just how far they dared go. Moreover, the day after the opening, the Shanghai government released a list of nearly 200 restrictions on foreign investment in the zone, placing further restrictions on it potential.

Finance is another key area where China’s leaders could push for change. SOEs (State-Owned Enterprises), which account for about 40 percent of total industrial assets, thrive on cheap loans from state banks, yet are only half as profitable as China’s private companies. This cozy arrangement also favors not only SEO executives, who frequently have close ties to officials setting financial policies, but often their friends and relatives. This forces smaller private companies to scramble for capital, often by plunging into a "shadow banking" network of lenders whose rates can be extortionate.

The finance system would benefit from more competition and less party control, with bankers having more freedom to adjust saving and lending rates and practices. However, SOEs needn’t worryabout radical change. They pay dividends to government agencies and minority shareholders, and serve policy purposes, such as securing international oil and mineral rights. They also have allowed powerful and entrenched families to enrich themselves: for example, members of former Premier Li Peng’s family have held a dominant role in the electricity sector. SOEs, as official documents state, are "an important foundation of Communist Party rule" — that’s unlikely to change anytime soon.

What will likely change, however, is the system of local government finance. According to a Ministry of Finance report, local governments now get more than half of their total revenue from land sales, incentivizing them to seize farms and homes for resale to developers at high prices. Some proceeds then go into local treasuries, some to corrupt officials and lesser amounts to those who were displaced, often leading to angry — even violent — protests. Beijing knows this must change, and Chinese economists expect a new tax and grant regime. Likewise, the discriminatory hukou system — residence permits that give access to local benefits such as places in public schools, and which excludes some 200 million migrant workers who fill important city jobs but can’t live there legally — will likely be modified to allow more benefits for migrant workers.

As for political reforms, the ruling elite have made it clear that widespread calls for greater openness and accountability will not be granted, at the plenum or elsewhere. Xi continues to crack down harshly on public dissent and on social media. Activists who have called on leaders to disclose their personal assets as anti-corruption measures, like legal scholar Xu Zhiyong, have been jailed. And while a campaign against corruption high and low will continue throughout and after the Third Plenum — swatting both "tigers and flies" — its goal is to purge political embarrassments at least as much as it h
alts the corrosive practices that benefit so many officials.

But the chances of Xi unveiling a "blueprint of reform" as striking as that of his predecessor Deng is unlikely. And five years from now, Chinese leaders may be striking the same notes about the importance of reform — but with fewer people believing them.